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A poll of small business owners conducted by the National Federation of Independent Business (NFIB, www.nfib.com) gained 0.3 points in October. The poll addressed the optimism of small business owners in economic recovery.

The Index of Small Business Optimism gained 0.3 points in October, rising to 89.1 (1986=100), 8.1 points higher than the survey’s second lowest reading reached in March (the lowest reading was 80.1 in the second quarter of 1980). In the 1980-82 recession period, the Index was below 90 in only one quarter. In this recession, the Index has been below 90 for six quarters, indicative of the severity of this downturn.

“The October gain was minor, so the good news is still less bad news,” said William C. Dunkelberg, NFIB chief economist. Four of the 10 index components posted gains, two were unchanged, and four declined.

Employment

Eight percent (seasonally adjusted) reported unfilled job openings, unchanged from August and September. Over the next three months, 16% plan to reduce employment (unchanged), and 9% plan to create new jobs (up 2 points), yielding a seasonally adjusted net-negative 1% of owners planning to create new jobs, a 3 point improvement. In the last three months, 8% of the owners increased employment, but 19% reduced employment (seasonally adjusted), both statistics are better than September readings. However, the “job generating machine” is still in reverse.

Owners continued to reduce compensation at a record pace, with 11% reporting reduced worker compensation. Reports of increased compensation fell 3 points to 11%. Seasonally adjusted, a net 4% reported raising worker compensation, down 3 points from September and only 1 point above June’s record low reading.

Capital spending

The frequency of reported capital outlays over the past six months rose 1 point to 45% of all firms, 1 point above the record low reading logged in September (data first collected in 1979). Capital spending, and the demand for credit to finance it, is on the sideline. Plans to make capital expenditures over the next few months fell 1 point to 17%, just 1 point above the record low last reached in August. Seven% characterized the current period as a good time to expand facilities, down 2 points from September.

A net 11% expect business conditions to improve over the next six months, up 3 points from September but historically low. Consumer spending is weak, recent reports on consumer sentiment are discouraging, and there is nothing on the table in Washington to make owners more optimistic about the future, a recipe for depressed expectations and spending plans.

Inventories and sales

The net percent of all owners (seasonally adjusted) reporting higher sales in the past three months remained low at negative 31%, down 5 points and only 3 points above the record low last set in July. Unadjusted, 17% of all owners reported higher sales (down 4 points), and 44% reported lower sales (up 3 points). Widespread price cutting continued to contribute to reports of lower nominal sales. After a 1 point drop in September, the net% of owners expecting real sales gains improved 2 points to a negative 4% of all owners, still negative but 27 points better than the March record low level.

Small business owners continued to liquidate inventories, and weak sales trends gave little reason to order new stocks. A net-negative 26% of all owners reported gains in inventory stocks (more firms cut stocks than added to them, seasonally adjusted), 2 points worse than September, and only 1 point better than the record low of negative 27 recorded April through July. For all firms, a net-negative 3% (down 3 points) reported stocks too low. Plans to add to inventories improved 3 points to a negative 3% of all firms (seasonally adjusted).

Inflation

The weak economy continued to put downward pressure on prices. Ten percent of the owners reported raising average selling prices, but 30% reported price reductions. Seasonally adjusted, the net percent of owners raising prices was negative 17%, far more are cutting prices than raising them. Plans to raise prices fell 1 point to a seasonally adjusted net 5% of owners, 33 points below the July 2008 reading. On the cost or input side, the% of owners citing inflation as their number one problem (e.g. costs coming in the “back door” of the business) fell 2 points to 2% and only 4% cited the cost of labor, so neither labor costs nor materials costs are seriously pressuring owners.

Earnings

Reports of positive profit trends were unchanged at a net-negative 40 percentage points. The persistence of this imbalance is bad news for the small business community and a contributor to the reported difficulties in obtaining credit.

Credit

For those who want to borrow, getting a loan continues to be difficult, with a net 14% reporting loans harder to get than in their last attempt. With very weak plans to make capital expenditures, add to inventory and expand operations, it would appear that many of those trying to borrow are having cash flow difficulties due to very weak sales (most frequently reported as the top business problem).

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